Futures lower as N.Korea tensions extend to third day

12 August 2017

THE QUOTE: "Risk-averse sentiment is dominating global equities markets, and US indices have retraced from record levels over the last two days". Cracks are showing in what has been a virtually non-stop USA equity rally after a rapid escalation of tension between North Korea and the United States this week.

The CBOE Volatility Index .VIX , a barometer of expected near-term stock market volatility, closed at its highest since the election. So unless we see U.S. core PCE (personal consumption expenditure) heading higher in the next few months, then a rate hike in December would push the fed funds rate above the neutral rate and this could make market participants very nervous.

That prompted North Korea to say it was considering firing missiles near Guam, a U.S. Pacific island territory. It is now on track for its biggest weekly drop since the week before the November 8 USA presidential election.

"For quite some time the market hasn't really reacted to things on the Korean Peninsula because we know from the past it is largely North Korean sabre-rattling, and it may yet be".

It makes sense that investors would start to cut their positions in some of their winners and look for other investments that might be better bets for a rockier period for the markets and global economy.

In 3.28pm trading in NY, the Dow Jones Industrial Average fell 0.15 per cent, while the Nasdaq Composite Index declined 0.18 per cent.

The broad-based S&P 500 was hit even harder, dropping 1.5 percent to close at 2,438.22, while the tech-rich Nasdaq Composite Index lost 2.2 percent 6,216.87.

On the commodity front, Gold, the safe haven precious metal, has risen to a two-month high on the geopolitical tension.

If North Korea launches an attack that threatens the United States then China should stay neutral, but if the United States attacks first and tries to overthrow North Korea's government China will stop them, a Chinese state-run newspaper said on Friday.

"Tensions will continue to mount and could eventually develop into a "black swan" event that the markets are not prudently considering", Steve Hanke, professor of Applied Economics at the Johns Hopkins University, told the Reuters Global Markets Forum on Wednesday. "Safe-havens are bid and markets are a little uneasy".

Germany's DAX fell 0.7 percent to 12,068 and the CAC 40 of France lost 0.3 percent to 5,133.

The euro was down 0.1 percent at $1.175 while the dollar fell 0.6 percent to 109.68 yen.

The yen tends to benefit during times of geopolitical or financial stress as Japan is the world's biggest creditor nation and there is an assumption that Japanese investors there will repatriate funds should a crisis materialise. In 3.14pm trading, the Standard & Poor's 500 Index inched 0.06 per cent lower. The euro fell to $1.1728 from $1.1757.

The 30-year bond US30YT=RR last rose 28/32 in price to yield 2.7759 percent, from 2.818 percent late on Wednesday.

"The most visible impact of escalating verbal threats between North Korea and President Trump comes at the long end of the U.S. Treasury curve", said Jim Vogel, interest rates strategist at FTN Financial in Memphis.